3.3. Strategic Business Units

Area of Business 1, deciding on which business activities your company will pursue, should be concluded by dividing your company into strategic business units. Each strategic business unit should be a homogenous (inherently similar) part of the company, for which it is possible and expedient to set separate but related business strategies.
(Keřkovský and Vykypěl, 2006, Hanzelková, Keřkovský, Odehnalová, Vykypěl, 2009).

The most common criterion for dividing a company into SBUs is differentiating customers and their needs, as well as the pragmatic need to implement a specific, customer-oriented strategic approach (business strategy). Companies divide up their business activities for this reason, setting different business strategies for different products or product groups.

A strategic Business Unit, SBU is homogenous (inherently similar) part of the company, usually defined by a specific customer group and their needs (Keřkovský a Vykypěl, 2006).

Strategic Business Units– how to divide a smaller company’s business activities?

For example, for a small language school that offers language courses and also offers translating services, it can be a good idea to define two strategic business units - A SBU for language courses and SBU for translations.

Another example can be a company with about a 10 million annual turnover from selling sporting goods. The company has both a brick-and-mortar store as well as an online shop. The company also rents out equipment and has recently begun organizing outdoor activities and training for people and companies. This company could benefit from a detailed, business strategy for four relatively different areas of business, resulting in four business units: A SBU for brick-and-mortar stores, SBU for the online store, SBU for sporting equipment rentals, and a SBU for outdoor events and training.

Corporate strategy – How to select a line of business

Another aspect can be addressed using the above-mentioned company as a point of reference. Although it has focused primarily on in-store sales over the past 10 years, as it brought in most of their income and profits, the past few years have brought about a drop in mark-ups and increase in competition, resulting in a drastic change in their income and profits. The brick-and-mortar store is not bringing in numbers, while online sales are growing, with the company’s fastest growing sector being outdoor training. A pertinent question for this company is whether or not it will be financially viable to operate the brick-and-mortar store in the future. This is a frequently addressed scenario with respect to the company’s corporate strategy - dissolving one line of business in the favour of a more lucrative business opportunity.

Dividing your company into SBUs according to product type (or customer group and their needs) will not always be the right choice for your company. Keřkovský and Vykypěl (2006) state that a company can be divided into SBUs according to different criteria as well:

1. Organizational criteria - when the company’s existing organizational structure is retained when defining SBUs and the company is still able to secure the necessary competitiveness of each SBU in a  particular market. Keřkovský and Vykypěl (2006) use an engineering company as an example, which produces a wide range of products, and whose projection, supply, manufacturing and distribution processes are virtually independent of one another, with their products being sold in different markets. This company can have, for example, three divisions: the foundry, machine shop and assembly plant. The SBUs can then be designated according to these divisions.

2. Strategic/marketing, when defining SBUs from the perspective of a competitive strategy in a certain market, it is not possible or beneficial to copy the company’s organizational structure. The SBU can then infiltrate existing organizational units. The authors use a clothing factory as an example, where products are manufactured for a differentiated market as well as for regular customers. In this case, according to Keřkovský and Vykypěl, it is possible to define two SBUs within the existing organizational structure: one aimed at the differentiated market and the other at the generic market. There may not be a difference in the actual products for both SBUs. There may, however, be different marketing elements in play: distribution, pricing etc.  

3. Projections - A SBU can, in this case, cover activities related to the implementation of a specific project. An example of this is the production of capital equipment (Keřkovský and Vykypěl, 2006).

Different methods can be combined as well. For example, publishing companies can organize their SBUs according to different products - dailies, weeklies, and a third, “cross-cutting” SBU – commercials, advertisements (Keřkovský, Vykypěl, 2006).

Conducting business in small and medium-sized companies will often involve only one SBU (e.g. a small, local advertising agency that only does web design).